Topics: Risk Management
Topics: Risk Management
January 28, 2021
January 28, 2021
Last year will forever be defined by COVID-19’s devastating impact across societies and economies. However, the global pandemic also intersected with a range of other threats to accelerate and exacerbate preexisting global challenges and drive unexpected outcomes. Organizations will now need to appreciate how these issues might develop if their strategies and business models are to stand the test of time.
The Global Risks Report 2021, prepared by the World Economic Forum in collaboration with Marsh & McLennan and other partners, reflects on disparities in the socioeconomic fallout from the COVID-19 pandemic and the implications for the next decade. Strengthened by the insights of more than 650 global risk experts and leaders, the report contains four broad messages, detailed below.
1. Societies will likely continue to grapple with the long-term impacts of the pandemic on their economies. An already sluggish global economy at the end of 2019 is expected to see that growth has dropped by 4.4 percent in 2020, while governments collectively expended almost USD 12 trillion in fiscal measures to support their citizens through the crisis. The road to recovery remains arduous and vulnerable to setbacks from new surges of the virus in the foreseeable future, while pressures on household purchasing power, business reluctance to invest in fixed assets, and government debt crises may also hold back growth.
Downside scenarios set out a global gross domestic product that may be, by the end of 2022, 8.5 percent smaller than pre-pandemic projections—a total loss to economic output in the order of USD 23 trillion. While recently announced large-scale stimulus measures are welcome for many, the challenge ahead is how to transition successfully from providing “life support” in the form of unemployment aid, rental assistance, and tax reliefs to the transformational agenda of revitalizing and restructuring economic ecosystems, sectors, and businesses with an eye toward a sustainable future.
2. Inequality, already on the rise pre-pandemic, was significantly exacerbated by the crisis along multiple dimensions. Massive waves of employment loss globally have endangered the livelihoods of millions of people and may be consolidated in the recovery. Small businesses, youths (aged 15-24), unskilled workers, working parents, and minorities—overrepresented in sectors hardest hit by the pandemic—saw retrenchments and closures at multiples of national averages. Female-owned businesses in North America closed at nearly twice the rate last year of their male-owned counterparts, and Black-owned businesses in the United States suffered closures 2.4 times more than those that were white-owned.
At the same time, lockdowns across the world have interrupted important pathways to socioeconomic mobility, with the education of billions significantly disrupted and workplace constraints throwing a new spotlight on digital divides. Livelihood impacts and disparities have amplified mental health challenges, which will reverberate for many years. Forty percent of adults in the United States have experienced increased anxiety and depressive disorders over the past year, disproportionately so among the young (18-24 years old), racial and ethnic minorities, essential workers, and caregivers.
3. Escalating fractures in domestic politics threaten democracy and the rule of law. Trust in governments, public institutions, and businesses across the world has greatly diminished, often catalyzed by widespread misinformation, mounting social polarization, and hyper-partisanship. Trends suggest that mobility rights have become more constrained, Internet freedom has declined, and surveillance has increased. Pro-democracy and anti-government protests have been intense against injustice, authoritarian behaviors, and shortcomings in national pandemic responses. In some countries this sets a new tone for the future; elsewhere, achieving unity and restoring confidence in public institutions will be hard work.
4. Geopolitical schisms may grow as the pandemic accelerated the existing global trend toward a more protectionist stance. The US-China rivalry continues to intensify; foreign direct investment restrictions across advanced economies have expanded markedly on national security grounds; and challenges stemming from state-on-state cyberattacks have become more acute. While the pandemic may have created turmoil for the cross-border supply of critical goods, moratoria on trade disputes provide hope for the ability of global trade to underpin the recovery and the 40 million US jobs in export sectors, of which 98 percent are with small businesses.
Pressures on several fronts introduce the prospect of a disorderly shakeout for different sectors, which it will be vital for businesses to anticipate at a time of inherent fragility. With governments in all economies holding center stage and keen to seize opportunities for a fundamental reset, it is likely that the implementation of industrial strategy and thematic priorities will generate not only winners and losers, but also disruptive discontinuities in business ecosystems. Regarding the digital agenda, technology giants came out of 2020 with stronger, more diverse revenue streams, with enhanced investment power, and better positioned to compete on more strategic agendas—but also facing a plethora of government-led lawsuits, investigations, regulatory proposals, and legislation across the world. How this plays out will have ramifications for companies in other sectors, whose technology agendas have become more ambitious and more accelerated because of the crisis.
Finally, stakeholder scrutiny has significantly increased. The focus on environmental performance has risen and corporate ethics are on radars, with workforce diversity, supply chains, and employee exploitation among top issues considered. Meeting employee expectations that companies take stances—and quickly—on key issues may take leaders out of their comfort zones and present commercial dilemmas.
As they take stock of this turbulent risk landscape and guide management teams, boards might wish to reflect on four approaches that will help enhance the resilience of their organizations.
First, there has been much valuable discussion in recent years about disruptive risks. The past year, though, has pressed firms to appreciate the likelihood of concurrent crises, the validity of more extreme scenarios, and the existence of ignored tail risks that were lurking in risk registers all this time. This argues that companies should develop tougher stress tests to understand how they would stand against different eventualities.
Second, the crisis has made firms acutely aware that resilience is not a fixed standard, but an evolving, active process in which organizational muscles are stretched and honed. The most advanced businesses are able to flex trade-offs between agility, efficiency, and robustness with confidence, even at times when data and intelligence are weak.
Third, as boards look to the next year, it will be important to have one eye on near-term surprises and setbacks and the other on longer-term transformations. If companies only do the former, the price of survival may be obsolescence.
Fourth, organizations need to find the right balance between human capital and technological capital and anticipate associated risks accordingly. There’s no question that technology and data have underpinned governmental responses to the pandemic and enabled firms to keep working during the crisis—but the ability to reshape working practices, motivate employees, and retain talent in the recovery will be critical for ongoing success.
Richard Smith-Bingham is an executive director of Marsh & McLennan Advantage and a key contributor to the Global Risks Report 2021.
NACD: Tools and resources to help guide you in unpredictable times.